QUALMED MAKES SECOND REQUEST OF FOUNDATION TO RECOVER
MILLIONS IN ASSETS FROM HEALTH NET; MONEY NEEDED
FOR CASH-STRAPPED STATE HEALTH CARE PROGRAMS
PUEBLO, Colo., Aug. 10 /PRNewswire/ -- QualMed, Inc. (NASDAQ: QLMD) said today it sent a letter on Aug. 7 to The California Wellness Foundation requesting that the foundation take action on behalf of the people of California against Health Net, HN Management Holdings, Inc., its parent company, and Health Net executives and directors to recover the Class A stock of HN Management Holdings, which represents a 27 percent equity interest in Health Net.
The letter also requests that the foundation recover the difference between the $300 million which the foundation was to receive at the time of Health Net's conversion from nonprofit to for-profit status and the lesser amount it actually received.
Recovery of these funds and assets from Health Net will help California "support much needed health services to the poor and disadvantaged as well as community-based disease prevention programs providing screening and immunization services," the letter said.
"With the present fiscal and budgetary crisis in California, these assets are needed more than ever," it continued.
QualMed originally made a request in an Aug. 1 letter to the foundation that it take action to recover these assets, but QualMed has not received a reply from the foundation.
QualMed contends in its Aug. 7 letter that Health Net executives unlawfully enriched themselves by more than $48.5 million by arranging to acquire 20 percent of Health Net's stock for only $1.5 million when the HMO converted from nonprofit to for-profit status on Feb. 6, 1992. QualMed contends that this 20 percent stake -- purchased for only $1.5 million -- was actually worth more than $50 million.
In addition, only one day after the conversion, the Class A stockholders "caused additional...(HN Management Holdings) shares to be issued to themselves as stock grants without paying any consideration, thereby diluting the foundation from 80 percent of the equity to 73 percent."
The QualMed letter notes that this issuance of stock grants violated the California Department of Corporation's one-day-old conversion order which authorized issuance of additional shares of HN Management Holdings only if holdings of all shareholders, including management, were diluted proportionately and only if fair market value was paid for such shares.
The letter also contends that the market value of the $225 million in Health Net notes issued to the foundation pursuant to Health Net's conversion was actually less than $200 million. This means that the actual value the foundation received from Health Net was less than the $300 million required by the DOC-approved conversion. QualMed's letter said that the foundation and its directors "have done absolutely nothing to undertake their responsibility...to recover the stock and assets belonging to the citizens of California" and have, in fact, "engaged in a pattern of activity...supporting the efforts of Health Net's self dealing management and directors to acquire Health Net for themselves..."
QualMed noted that it has taken legal action against Health Net, HN Management Holdings and their executives and directors and has been granted a preliminary injunction preventing them from further diluting the foundation stock or subordinating the $225 million in notes.
"Unfortunately, QualMed cannot presently bring an action in the name of the People (of California) to recover the (Class A) stock (from Health Net management)," QualMed said, noting that it has requested the foundation to take this action.
If the foundation refuses to take action, QualMed asks the foundation to assign its claims to QualMed so that QualMed can proceed to recover the assets on behalf of the citizens of California.
QualMed said that it would deliver the assets to "an appropriate existing charity which will see that they are used for...(much-needed) health services."
The letter gives the foundation until Aug. 14 to tell it what the foundation intends to do or "we shall pursue all legal actions available to us to recover these assets belonging to the People of California."
QualMed owns HMOs operating in the six western states of California, Colorado, Idaho, New Mexico, Oregon and Washington and owns one of the largest preferred provider organizations in California. QualMed also recently announced its acquisition of an inactive shell indemnity insurance company licensed to transact insurance in 34 states.
Malik M. Hasan, M.D., chairman and president and chief executive officer of QualMed, sent the following letter, dated Aug. 7, to Howard A. Kahn, president of The California Wellness Foundation:
In furtherance of our August 1, 1992 letter to you (to which we have received no reply), Qual-Med believes The California Wellness Foundation (the "Foundation") has a legal responsibility to the People of California to recover (1) the Class A stock of HN Management Holdings, Inc. ("HNMH") from the individual holders of the stock because of the obvious and patent unlawful enurement resulting from the issuance of the Class A stock to the self dealing managers and directors of Health Net for $1.5 million; and (2) the shortfall in the $300 million, which the Foundation was supposed to receive at the time of Health Net's conversion. I am sure that the Foundation's financial advisers have informed you, as have Salomon Brothers and Houlihan Lokey advised Qual-Med, that the $225 million of notes from Health Net had a net present value when issued to the Foundation of less than $200 million and that the Class A stock has a value when issued of much more than $50 million. The Foundation, at the very least, should have received assets with a present value of $300 million at the time of Health Net's conversion; however, it only received $75 million in cash and two 15-year notes worth less than $200 million.
The Class A stockholders only paid $1.5 million for the stock resulting in over $48.5 million of enurement immediately upon the conversion of Health Net. Further, on February 7, 1992, only one day after the DOC's conversion order was executed, the Class A stockholders caused additional HNMH shares to be issued to themselves as stock grants without paying any consideration, thereby diluting the Foundation from 80 percent of the equity of HNMH to 73 percent. This additional enurement to the Class A stockholders violated the DOC February 6, 1992 order which authorized the issuance of additional HNMH shares of stock only if all stockholders (including the Foundation) were diluted pro rata and the fair market value of the stock was paid by the recipients. As they paid nothing for the stock and diluted the Foundation while increasing the shares of the Class A stockholders, the People of California (represented by the Foundation) were further deprived of substantial assets belonging to them.
It is essential that all monies, shares or other assets belonging to the People of California be recovered. These funds and/or assets are necessary to support much needed health services to the poor and disadvantaged as well as community-based disease prevention programs providing screening and immunization services. With the present fiscal and budgetary crisis in California, these assets are needed more than ever.
To date, the Foundation and its Board of Directors have done absolutely nothing to undertake their responsibility to the People of California to recover the stock and assets belonging to the citizens of California. Qual-Med believes that the Foundation has engaged in a pattern of activity, as set forth in this letter, supporting the efforts of Health Net's self dealing management and directors to acquire Health Net for themselves for $104 million, then $108 million and then $127 million. The Foundation made no attempt throughout 1991, and to date, to question, oppose, or take any action regarding the efforts of the self dealing management and directors of Health Net to obtain ownership of Health Net at a value far below the fair market value.
To the contrary, the Foundation supported all of the low bids advanced by the self dealing management and directors; it executed the documents required to carry out the conversion of Health Net without obtaining separate legal counsel or advice from an investment advisor; it accepted notes having a net present value far below $225 million and therefore did not even receive value equal to $300 million, which amount is substantially below the fair market value of Health Net at the time of its conversion; it stood silently by while the directors of HNMH (including Roger Greaves, who was also the Chairman of the Foundation at that time) participated in receiving additional stock of HNMH on February 7, 1992 which diluted the Foundation from 80 percent to 73 percent; it accepted sole legal representation at the time of conversion of Health Net from Douglas Mancino, whom the Foundation knew simultaneously represented Health Net, HNMH, the Class A stockholders and the self dealing directors of Health Net; it knowingly failed to require arms length negotiations regarding the $225 million of notes issued by Health Net to it, the shareholder agreement and all the other pertinent conversion documents which now bind the Foundation's arms behind it; and its new Board of Directors, who were elected on or about February 19, 1992, have ratified and approved all of the foregoing by their failure to do anything to recover the rightful property of the People of California.
Qual-Med has undertaken legal action against Health Net, HNMH and a number of self dealing directors and management of Health Net with the result that a restraining order has been issued by the Sacramento Superior Court prohibiting said defendants from doing anything to further dilute the Foundation stock or to subordinate the $225 million notes. Unfortunately, Qual-Med cannot presently bring an action in the name of the People to recover the stock held by the Class A stockholders. We request that you promptly advise us if the Foundation will take action to recover the stock and other assets belonging to the People of California. If the Foundation refuses to recover the People's assets, then we request that the Foundation assign its claims against the Class A stockholders to Qual-Med. Upon our recovery of the assets, we shall deliver them to an appropriate existing charity which will see that they are used for the much needier health services previously referred to. If we do not hear from you by August 14, 1992, as to what action the Foundation intends to take, we shall pursue all legal actions available to us to recover the assets belonging to the People of California. We would appreciate your making available a copy of this letter to all of the directors of the Foundation in view of the important matters set forth herein.
-0- 8/10/92
/CONTACT: Bill Acton of Hill and Knowlton, 213-937-7460, for Qual-Med/
(QLMD) CO: Qual-Med, Inc.; Health Net, HN Management Holdings, Inc. ST: California IN: HEA SU:

BR -- NYON1 -- 8379 08/10/92 09:03 EDT

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